Rate-cut campaign in full swing

The clamour for a fresh round of interest rate cuts has begun. Spooked by a sharp and sudden fall in industrial growth, industrialists and bankers said the time had come to cobble a credible stimulus package that would put the stuttering economy back on the rails.

“Now is the time to immediately release the second stimulus package. To bring the Keynesian multiplier into full effect, a third stimulus package must be planned from now and released in mid-January to return the economy to a sustainable growth rate above 7%,” said Ficci secretary-general Mr. Amit Mitra.

“Assocham reiterates its demand that another stimulus package of Rs 70,000 crore is urgently called for to provide relief to corporate India, including a reduction of another 200 basis points in the cash reserve ratio (CRR),” he said.

The cash reserve ratio is the amount of total deposits that banks must park with the RBI. It currently stands at 5.5%.

Assocham also wanted the statutory liquidity ratio — the amount of deposits that banks must invest in approved securities such as government gilts — to be lowered from the current level of 24-20%, which would leave them with more lendable resources.

Last week, the RBI slashed both its repo (its short-term lending rate) and reverse repo (the overnight rate at which it borrows from banks) rates by 100 basis points each, signalling lower interest rates.

“The central bank could have gone a step further by cutting CRR and statutory SLR rates to send a stronger signal of liquidity support to companies,” said Ficci.

Bankers in Mumbai were certain that the central bank would act quickly to jump- start the economy.

“The RBI is certain to bring down key rates again. But it should also ensure that banks pass on the benefits of these reductions,” said one economist with a public sector bank. “We expect the IIP to continue to be weak till the end of the first half of the next fiscal,” said D. K. Joshi, principal economist of Crisil.

It might become positive, but will not recover till the end of this fiscal,” predicted D.K. Joshi, principal economist of Crisil.

Joshi expected the RBI to announce additional interest rate cuts. “The government has to realise that an increase in spending alone will not help in reviving industry,” he said.

On Wednesday, commerce minister Kamal Nath said another fiscal stimulus package would be announced next week to prevent a further deceleration in India’s growth rate. “The package will be directed at employment-intensive sectors. It could include sops for engineering and textile sectors as well as refinance for exporters,” Nath had added.

The first tranche of the stimulus package, worth at least Rs 30,000 crore, was announced last Sunday. The package included a 2% subvention in interest rate for export credit to labour intensive sectors like textiles, handicraft and leather, an across-the-board cut of excise duty by 4%, and increase in public expenditure by Rs 20,000 crore.